Question

Suppose Kevin and Jill both deposit $4000 into their personal accounts. If Kevin’s account earns 5% simple interest annually and Jill’s earns 5% interest compounded annually, how much will each account balance show at the end of 5 years? Calculate the difference between each account

Answer 1

Kevin's Account:
Pt = Po + Po*r*t.
Pt = 4000 + 4000*0.05*5 = $5000.

Jill's Account:
Pt = Po(1+r)^n.
r = 5%/100% = 0.05 = APR expressed as a decimal.
n = 1comp/yr * 5yrs = 5 Compounding
periods.

Pt = 4000(1.05)^5 = $5105.13.

Diff. = 5105.13 - 5000 = $105.13.